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Relationship between detection risk and audit risk.

Audit risk is the possibility that auditor issue an inappropriate opinion that is he says financial statements does not contain material misstatement when actually they do.

Audit risk is made by three types of risk which are an inherent risk, control risk, and detection risk.

Inherent risk is the risk that financial statements are misstated before internal control is put in place. Inherent risk is caused by the nature of balance or transaction or the nature of the entity’s business. For example, inventories have a higher risk of being overstated.

Control risk is the risk of internal control failing to detect, prevent and correct a material misstatement in the financial statements.

Detection risk, on the other hand, is the risk that auditor’s planning and testing fail to detect the material misstatement in the financial statement.

Inherent risk and control risk are managed by management, therefore auditor can not control them, instead, he will just evaluate them before determining detection risk. If his auditor concludes that inherent and control risk is high, then he will accept lower detection risk, since he wants an overall audit risk to be low. On the other hand, if he evaluates inherent risk and control risk to be low then he may accept high detection risk.
The auditor is only in control of detection risk.

Therefore, detection risk is just a component of overall audit risk.

The all component of audit risk are interrelated since if the misstatement occur at the first place (inherent risk) and internal control fail to detect, correct or prevent it (control risk) and auditor fail to detect through performance of audit procedures (detection risk) then auditor will reach the wrong conclusion and hence issue inappropriate opinion (audit risk).

1 thought on “Relationship between detection risk and audit risk.”

  1. Pingback: Sampling risk and how it affect sample size in audit. – ACCOUNTING CLASS

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